Units vs houses?

Don't know if you want to make an investment in a unit or a house? Here, I will share a bit of what I've picked up over the years.

skyscrapper

My general rule of thumb

  Growth  Rental yield Risk Overall returns Barrier of entry
Units  Lower Higher Lower Lower Lower
Houses  Higher  Lower  Higher Higher Higher

Of course there are going to be cases where the above doesn't hold, but it's a good start for most cases.

In fact, I spend most of my time looking for factors for a given potential purchase that can break these general rules. There are a couple things that may affect the table rules:

  1. Supply and demand: for any given suburb, do your research to find out the units vs houses ratio. Then look for any trends and patterns in the area and ask yourself why there are more/less units in this suburb than houses for example.
  2. Community and culture: the culture community in a given area may have a huge impact on the demand for units or houses in the area.

Investing in units

Things to find out when investing in units.

  • Rental rates
  • Strata costs
    • High strata costs can have a huge impact on your investment returns.
    • I would avoid units with high strata costs unless you can compensate that with extra rent or expected capital growth
  • Accessibility
    • how convenient is the apartment block in terms of location? Close to transport? Close to grocery stores? Close to resturants? 
    • if an apartment block is not in a convenient location, I generally pass on the purchase

Investing in houses

When it comes to houses, you have to be aware that you have to pay all the insurance, maintenance and upkeep fees. Anything that happens to the house ultimately becomes your problem. When I do my forecasting calculations when I buy a house, I focus heavily on 2 things: growth and sustainability (affordability). Finance 101 says higher risk brings higher returns, that is valid when you are investing in houses, but please, make sure you are able to afford the upkeeping costs of holding a house. Relative to a unit, houses generates a lower rental income (rent to property value ratio) and at a higher keeping cost, my advice is for those who are considering an investment in a house - other than being able to pay the initial deposit, MAKE SURE YOU CAN AFFORD TO MAINTAIN THE HOUSE.

You can always play around with different permutations using our affordability calculator.